Some time ago, a social network called Facebook raised 500$ million from Goldman Sachs (450 million) and Russian firm Digital Sky Technologies (50 million). This operation valuated Facebook at an astonishing 50$ billion. This is more than other well-established digital firms like eBay or Yahoo and double the market cap of Sony. Yes, I know Facebook has 600 million users or 'potential clients' (in business terms), but until now it has failed to monetize them. Its main source of revenue is advertising, and according to reports Facebook's success in it is far lower than the rest of the web. Its users have a clear objective in mind, communicating with friends, thus they do not pay attention to banners. Brands however, have found in Facebook the perfect channel to communicate with their clients; but Facebook itself is not seeing any money from this... In marketing, having a large audience and knowing a lot of information about said audience is key for success; but until know Facebook has been unable to use this at full power (conspiracy theories of Facebook selling user's personal data to other companies aside) so the 50$ billion market cap comes basically from estimations of the company's potential.Valuating a company based just on its potential is a tricky thing to do, as subjectivity comes to play. In the example of Facebook, maybe it has the necessary ingredients to earn lots of money, but nobody is cooking them into an edible product as of now. This takes us to the point where some very risky bets are done based purely on instinct, not real-world results or prospections. But investors around the world, sad with the absence of 'bulls' to ride on the way to market recovery did not mind that. They began to salivate on the thought of being part of the rise of a new giant, the social internet companies (commonly called 2.0). As such, when the invitation to the party appeared in the form of the LinkedIn IPO, and later the Yandex (the leading search engine in Russia) IPO the market was all-in.
But we must draw the line here, because LinkedIn and Yandex (some people refer to it as the Russian Google) have real-world results, high growth expectations... and primarily, they are already profitable. Investors have their reasons to place big money on them. But while this can be true for LinkedIn, Yandex or even Baidu (Chinese censorship is a big issue here though), I find it very difficult to justify such crazy investor interest in companies like Groupon, Facebook, Twitter, Pandora or even Skype (as talked here when Microsoft bought it) when they totally lack the results to back their asking prices. As much as you can like their services this does not make a company more financially appealing.
Groupon for example has filed for a 750$ million IPO. Their last quarterly results? 644.7$ million in sales (impressing), but a final loss of 113$ million in the period (depressing). Groupon's market is increasing rapidly though, which looks good, but their inability to post profits makes me think (personally) they are way overpriced. But the market is already biting its nails waiting for the moment to go after those shares...
I am using Groupon's numbers to make a case here, but this is not a personal attack to Groupon, as other companies are waiting in line for their IPO with similar claims and similarly poor numbers. You can blame it all on the Facebook effect, which has been heating up tech stocks and has made investors think that a wide internet presence is more than enough to be a good investment. It is not.
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